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C & D

Energy Company Listings

Last Friday saw the listing of Mighty River Power (MRP) on both the New Zealand and Australian stock exchanges. In light of the risk factors associated with this stock, particularly the geopolitical risk, this should be seen as a successful listing. There are some 110,000 plus direct investors. This includes a large proportion of investors who have not invested on the New Zealand Stock Exchange before. Estimates of the numbers of indirect investors via managed funds, in particular KiwiSaver investors, are greater than 1.1 million.

Indications are that the listing share price may have been around 20 – 25 cents per share higher if there had been no politicking by the political left. This has made the initial offering price seem more attractive to investors as it provides a cash yield of 5.2% using a 2014 prospectus dividend forecast of 13 cents per share. Taking the associated imputation credits into account, New Zealand investors are likely to receive a gross yield closer to 7.2%. This has made it an attractive investment for fund managers, both domestic and international.

This week is budget week. It is expected that the major announcement will be that Meridian will be partially privatised in late spring this year. There is also the prospect that Genesis Energy may also be partially privatised, possibly in the early New Year.

Analysts believe that there will be a fairly flat profile for wholesale electricity prices over the next few years, reflecting a soft demand environment. Earnings growth for the power companies will largely come from additional supplies coming on stream from geothermal, and from their overseas investments. MRP has for example the Ngatamariki geothermal power station coming on stream later this year.

Global and retail investors are attracted to strong yielding investments. Interest rates are low, with many investors focusing on equity income funds. Major economies are still engaging in quantitative easing. This acts to lower their exchange rate, further effectively enhancing returns for their off shore investments.

The New Zealand Stock Market will have a large weighting to Energy stocks, much of which is based on environmentally friendly renewable energy sources, when the partial privatisations of the state owned assets is completed. There are already Contact Energy, Trust Power, Vector, and Mighty River Power. Z may also be partially sold down, again possibly this year. Currently the “Cullen Fund” has a substantial shareholding. The other significant energy player is the New Zealand owned Todd Corporation.

With an abundance of high quality energy companies, there will be plenty of interest shown by fund managers, both global and domestic. It is up to New Zealand investors to invest in these companies long term and to further grow our capital markets. New Zealand investors have the home team advantage by being able to utilise the imputation credits, compared to foreign investors.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.